WoodMac: Copper “Well Below” Expectations Due to Coronavirus

The Wuhan coronavirus outbreak has been consuming news cycles across sectors since it was first detected in early December of last year, and it is now chewing into outlooks in the resources sector, with base metals down across the board.

For the global economy, vital signs are looking increasingly grim, with “Doctor Copper” suffering under the weight of uncertainty, government-mandated shutdowns and disruptions in demand in China.

“Copper prices are now trading well below our expectations because of this outbreak,” Nick Pickens, who is Wood Mackenzie’s research director for the red metal, said to the Investing News Network (INN).

Pickens said that an optimistic outlook has been flipped on its head.

“We had been anticipating a recovery in refined copper consumption this coming year. There had been positive developments in the trade dispute between the US and China, and manufacturing looked poised to make a slow recovery,” he said.

On the London Metal Exchange (LME), copper was trading at US$6,165 per metric ton on the first trading day of 2020, but it fell as far as 9.67 percent to US$5,650 on January 31. Since then, it has recovered slightly to US$5,713, but it’s still more than 8 percent behind where it started the year.

In line with the red metal’s turnaround from its January 31 low, Pickens said that copper appears to have a floor in value of around US$5,500.

“I think the market will be watching to see what happens on February 10, when the (Chinese) population is expected to return to work after the extended holiday.”

The Chinese government has been extending the Chinese New Year holiday in a bid to stave off the spread of further infection, though if it is extended further, Pickens said, “This could impact demand (and prices) in 2020 and the government may act.”

Looking at what economic action may look like, Pickens said if the coronavirus shaves a few percentage points of China’s GDP growth in Q1, Beijing will likely have no option but to stimulate the economy.

“This will be either through infrastructure spending, interest rate cuts and/or tax reductions. This could be positive for prices.”

According to WoodMac’s copper team, disruptions in the copper space are mostly to do with logistics as cities are quarantined and supply lines are disrupted. One of the biggest threats is acid storage, as smelters have continued to produce refined copper, meaning they are also producing acid, which must be stored. With markets disrupted, buyers are slim, so acid storage is becoming an issue.

“(WoodMac) understands Hubei (province, where Wuhan is located,) accounts for roughly 20 percent of total sulphuric acid consumption in China, which it sources from local smelters as well as those in neighbouring provinces, including Jiangxi, Anhui and Henan,” said analysts in a report on copper.

“As all the cities in Hubei are quarantined, the utilization rate of acid consumers in Hubei has declined and many smelters are now having difficulties selling their acid. We have heard that in some cases, smelters can find a buyer for their acid, but are finding it difficult to ship the acid due to the impact on the supply chains due to the virus. As a result, acid inventories at smelters are rising.”

Besides the logistical issues that are impacting smelters and suppliers, WoodMac’s report indicates that construction of copper-intensive projects will be delayed and that restricted movement for end users of copper will dampen demand.

Disruption in China is going to have a large impact on global copper consumption, as per WoodMac.

It will probably take one to two months for everything to return to “normal” under WoodMac’s most optimistic estimate, states the report.

“If China loses one month of copper demand, this means a reduction of more than one million tonnes of refined copper demand. However, some of the loss in copper demand, especially the demand from consumer durables, should be able to be clawed back later in the year if the health crisis dissipates in the first quarter,” the firm explains.

WoodMac adds, “On the other hand, demand loss from infrastructure and construction sector will be harder to make-up; best case scenario is that it would be delayed to later this year. As a result, we believe that there is now a significant downside risk to our forecast of 0.9 percent Chinese total copper consumption growth for 2020.”

For now, the coronavirus remains at the top of news bulletins globally, with a vaccine out of reach over two months into the outbreak — though not for lack of trying. As of February 6, official numbers sat at 565 fatalities and over 28,000 confirmed cases, with the vast majority in China. With China accounting for around half of global demand for refined copper, developments there will continue to direct where the copper price heads in the coming months.

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Securities Disclosure: I, Scott Tibballs, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.